Home Capital Uses Up $1 Billion "Lifeline", Seeks Additional Funding

Just one week after Canada's largest alt-mortgage lender Home Capital Group sent shockwaves across the Canadian financial system, when it confirmed that long-running allegations about its liar-loan business were true, and suffered a spectacular bank run necessitating emergency loans which yield a stunning 22.5%, the company is now "actively seeking expanded sources of funding" having drawn half of its C$2b rescue loan, according to an email sent to mortgage brokers seen by Bloomberg News.

“This is a fluid situation, and we are optimistic our challenges are temporary,” Pino Decina, executive vice president of residential mortgage lending, said in the email.

He further said that despite what’s "written in media" the company continues to experience demand for financing from brokers. He did not deny, however, the rest of what is written in the media, namely that as the company's GICS's mature, it risks running out of liquidity in the coming weeks even with the full C$2bn facility fully drawn, especially since by now it is almost certain that its retail deposits have all been redeemed.

Making matters worse, earlier in the day Bloomberg reported that Home Capital Group is "losing touch with a constituency crucial to its survival: brokers who feed the book of business at Canada’s embattled mortgage lender."

According to the news website, Samantha Brookes, founder of Mortgages of Canada, sent in at least three clients’ applications since April 26, the day Home Capital announced a C$2 billion ($1.5 billion) rescue loan and warned it may miss financial targets. She hasn’t heard back. True North Mortgage and Butler Mortgage are exploring options with other banks and some brokers say loans have been delayed.

"When you can’t place a file, you send it to Home Trust - and we don’t even know if they’ll be able to do deals going forward," Brookes said by phone from her office in northeast Toronto, referring to Home Capital’s operating unit. "I’m concerned. If I can’t close deals I don’t get paid. And if you can’t send it to Home Capital, the consumer may need a second mortgage, or to pay a higher interest rate."

Such a "disconnect" with brokers likely signals the company is reluctant to take on new business as it faces a terminal deposit run and soaring borrowing costs from the credit line from Healthcare of Ontario Pension Plan. More than a third of Brookes’s business goes to Home Capital and it’s the same for many alternative brokers, who call Home Capital a "lender of last resort.

Home Capital responded to Bloomberg denying that business is slow. “Home continues to conduct business," Decina said in an emailed reply. "We have been funding every day."

Alas, having already used up C$1 billion, or half, of its emergency "lifeline" loans is a very clear indication that Decina is not telling the whole truth.

As of this moment, HCG has another C$1 billion in ultra expensive liquidity left. When that runs out, the company will have found an even "greater fool" source of funds - one which may prime the Ontario Pensioners who provided the C$2 billion - or it has two options, assuming it hasn't sold by then. Liquidation or beg for a government bailout.

At the current rate its cash is declining, we will have an answer within a week.